"Are You a CEO Interested in a Feature Interview?"
All Interviews are 100% FREE of Charge
Our experts answer readers’ banking questions and write unbiased product reviews (here’s how we assess banking products). In some cases, we receive a commission from our partners; however, our opinions are our own. Terms apply to offers listed on this page.
- CD interest earned for the year must be included in your tax return as ordinary income.
- If you paid an early withdrawal penalty on a CD, that will factor into how much money you report.
- CDs likely won’t have a huge impact on your taxes, unless you plan to deposit a substantial amount.
The best CD rates are well over 5% right now, so it could be a great time to open an account. But with such high interest rates, you may be wondering: Do you have to pay taxes on what you earn?
Although a certificate of deposit offers a great way to earn interest, know that any interest earned on bank accounts is taxable. Here’s what you need to know about reporting interest on CDs so you’re prepared for filing taxes if you open an account.
How is interest from CDs taxed?
Interest earned from CDs is taxed as ordinary income. Elizabeth Plot, CFP and founder of Primas Financial Planning, says CDs are usually taxed every year. It’s also taxed the same as income you earn from a W-2 employer. The exact tax rate you’ll pay depends on which tax bracket you’re in, and it can vary from year to year.
Current federal income tax rates range from 10% to 37%. To figure out which tax bracket you’re in, you’ll have to add up your salaries, wages, bonuses, interest income, and tips; then, you’ll have to see if there are any deductions.Â
If you withdrew money from your CD before the term ended and paid an early withdrawal penalty, that will also play a factor. The early withdrawal penalty will be deducted from your total earnings for the year. For example, if you paid a $50 withdrawal penalty and earned $100, the amount that will be taxed is $50.
How do CDs affect taxes?Â
CDs will likely not have a big impact on your taxes. It will probably only noticeably affect taxes if you have a substantial amount of money in an account and earned a lot in interest over the year.Â
“If you’re putting in $1,000, it’s not going to have a huge impact. But if you’re putting in bigger amounts, it might affect your marginal tax rates a little bit,” says Plot. “I would recommend that that individual contact their tax professional if they have any concerns, especially if they’re planning to invest a larger amount.”
How to pay taxes on CDs
You have to pay taxes on CDs before the annual tax deadline. Otherwise, you may have to pay a penalty. That said, the IRS may also provide payment extensions to taxpayers impacted by disaster situations.
You can report CD interest when you complete your annual tax return. You’ll only report your earnings for the year, not the money that you originally deposited into the CD.
You should receive a 1099-INT form from your bank before January 31 if you earned more than $10 in interest. If you do not receive a 1099-INT form, you’ll still have to report the interest earned on a CD. You could check your mobile banking to review your online bank statements or contact your financial institution to request this information.Â
See Insider’s best tax software>>
Taxes on CD interest FAQs
Yes, you have to pay taxes on traditional CDs even if you don’t get a 1099-INT from your financial institution. You could pay a penalty from the IRS if you don’t report it.
No, CDs are generally taxed annually. For example, if you had a 5-year CD, you would include interest earned in your tax return each year, not at the end of the 5-year term. You’ll typically receive a 1099-INT, which will tell you what you earned for the specific year.
You can avoid annual tax on CD interest if you open a CD through a tax-advantaged account, like an IRA. When you open an IRA, you can invest money in different options, like stocks, bonds, or even CDs. If you get a CD this way, you’ll pay taxes when you make a withdrawal.Â